I was already mundo unhappy with an Alan Greenspan op-ed in the Financial Times, which takes issue with Dodd Frank for ultimately one and only one disingenuous and boneheaded reason: interfering with the rent seeking of the financial sector is a Bad Idea. It might lead those wonderful financial firms to go overseas! US companies and investors might not be able to get their debt fix as regularly or in an many convenient colors and flavors as they’ve become accustomed to! But the Maestro managed to outdo himself in the category of tarting up the destructive behaviors of our new financial overlords.

What about those regulators? Never never can they keep up with those clever bankers. Greenspan airbrushes out the fact that he is the single person most responsible for the need for massive catch-up. Not only due was he actively hostile to supervision (and if you breed for incompetence, you are certain to get it), but he also gave banks a green light to go hog wild in derivatives land. And on top of that, he allowed banks to develop their own risk models and metrics, which also insured the regulators would not be able to oversee effectively (there would be a completely different attitude and level of understanding if the regulators had adopted the posture that they weren’t going to approve new products unless they understood them and could also model the exposures).

And the most important omission is that the we just had a global economic near-death experience thanks to the recklessness of the financial best and brightest. You’d never know that if you read the Greenspan piece, which merely argues against the idea of restricting financial activity under the guise of objecting to certain provisions of Dodd Frank.

I keep referring to this passage of a 2010 paper by Andrew Haldane, the Executive Director of Financial Stability for the Bank of England because Greenspan, the Administration, and other banking industry cheerleaders keep pretending that the crisis was a mere blip and their ongoing propagandizing needs to be countered:

Table 1 looks at the present value of output losses for the world and the UK assuming different fractions of the 2009 loss are permanent….

As Table 1 shows, these losses are multiples of the static costs, lying anywhere between one and five times annual GDP. Put in money terms, that is an output loss equivalent to between $60 trillion and $200 trillion for the world economy and between £1.8 trillion and £7.4 trillion for the UK. As Nobel-prize winning physicist Richard Feynman observed, to call these numbers “astronomical” would be to do astronomy a disservice: there are only hundreds of billions of stars in the galaxy. “Economical” might be a better description.

It is clear that banks would not have deep enough pockets to foot this bill. Assuming that a crisis occurs every 20 years, the systemic levy needed to recoup these crisis costs would be in excess of $1.5 trillion per year. The total market capitalisation of the largest global banks is currently only around $1.2 trillion. Fully internalising the output costs of financial crises would risk putting banks on the same trajectory as the dinosaurs, with the levy playing the role of the meteorite.

In other words, the financial system as it is presently constituted is so destructive to society at large that very radical interventions are warranted to reduce the costs it imposes on others. To put it another way, it is an extraordinarily inefficient at looting. And Haldane’s core observation, that severe financial crises result in permanent output losses (more colloquially, a permanent reduction in the standard of living) is not controversial. And I’ve recently corresponded with Haldane and he stands by this rough and ready estimate.

Yet as horrific as the Greenspan piece is, he manages to sink to unimaginable new lows with the Big Lie he offers at its close:

The vexing question confronting regulators is whether this rising share of finance has been a necessary condition of growth in the past half century, or coincidence. In moving forward with regulatory repair, we may have to address the as yet unproved tie between the degree of financial complexity and higher standards of living.

In other words, the defective growth model of the last 30 years, one that rested on stagnant worker wages and relied on rising levels of debt which fueled bigger and bigger asset bubbles, is now presented as a virtue.

Consider this alternative formulation from ECONNED:

Let’s use a different metaphor to illustrate the problem. Say a biotech firm creates a wonder crop, the most amazing creation in the history of agriculture. It yields far more calories per acre than anything else, is nutritionally extremely complete, and can be planted and harvested with far less machinery and equipment than any other plant. It is tasty and can be prepared in a wide variety of ways. It is sweet too, so it can be used in place of sugar and high fructose corn syrup at lower cost. We’ll call this XCrop.

XCrop is added as a new element in the food pyramid and endorsed by nutritionists and public health officials all over the globe. It turns out that XCrop also is an aphrodisiac and a stimulant (hmm, wonder how they engineered that in) and between enhanced libido and more abundant food supplies, the world population rises at a faster rate.

Sales of XCrop boom, displacing traditional agriculture. A large amount of farmland is turned over from growing other types of produce to XCrop. XCrop is so efficient that agricultural land is taken out of production and turned to other uses, such as housing, malls, and parks. While some old-fashioned farms still exist, they are on a much smaller scale and a lot of the providers of equipment to traditional farms have gone out of business.

Twenty years into the widespread use of XCrop, doctors discover that diabetes and some peculiar new hormonal ailments are growing at an explosive rate. It turns out they are highly correlated with the level of XCrop consumption in an individual’s diet. Long-term consumption of high levels of XCrop interferes with the pituitary gland, which controls almost all the other endocrine glands in the body and the pancreas.

The public faces a health crisis and no way back. It would be very difficult and costly to put the repurposed farmland back into production. Some of the types of equipment needed for old-fashioned farming are no longer made. And with the population so much larger than before, you’d need even more farmland than before. The world population has become dependent on the calories produced by XCrop, so going off it quickly means starvation for some. But staying
on it is toxic too. And expecting users simply to restrain themselves will likely prove difficult. The aphrodisiac and stimulant effects of XCrop make it addictive.

Advanced economies have become hooked on debt technology, which, like XCrop, is habit forming and hard to wean oneself off of due to its lower cost and the fact that other approaches have fallen into partial disuse (for instance, use of FICO-based credit scoring has displaced evaluations that include an assessment of the borrower’s character and knowledge of the community, such as
stability of his employer). In fact, the current debt technology results in information loss, via disincentives to do a thorough job of borrower due diligence (why bother if you are reselling the paper?) and monitoring of the credit over the life of the loan. And the proposed fixes are not workable. The Obama proposal, that the originator retain 5% of the deal and take correspondingly lower fees, is not high enough to change behavior. And a level that would be high enough to make the originator feel the impact of a bad decision would undercut the cost efficiencies that made securitization popular in the first place. You’d have better decisions, but less lending, and higher interest rates. That’s ultimately a desirable outcome, but as in the XCrop situation, no one seems prepared to accept that a move to healthier practices will result in much more costly and less readily available debt. The authorities want to believe they can somehow have their cake and eat it too.

And in case you think this reading is a tad too downbeat, a very good piece in the National Journal by Michael Hirsh, The Resurrection, demonstrates not merely that perilous little has changed in the wake of the financial crisis, but that in many respects, the pathology has gotten even worse:

Government data indicate that lending abroad is up even as investment in plants and equipment at home continues to decline or remain flat as a percentage of GDP. FDIC-insured banks loaned nearly twice as much, $62.7 billion, to banks in other countries as of the end of 2010 as they did the year before…

Regulators in Washington, in Basel, Switzerland, and elsewhere have failed to agree on rules for the much-touted “resolution authority” in the new law. Theoretically, this rule is supposed to give the United States the right to liquidate or unwind a failing firm, no matter how big, without the systemic crash that nearly followed the Lehman bankruptcy of September 2008. The rule is still just a draft, however, and so far it doesn’t look very workable internationally.

That’s because countries are addressing the same issue in very different ways….Straddling all these fractured lines are Citi and the other big global banks. “Citibank is a $1.8 trillion company, in 171 countries with 550 clearance and settlement systems,” says one senior Federal Reserve Board regulator who would speak frankly only on condition of anonymity. “We think we’re going to effectively resolve that using Dodd-Frank? Good luck!”….Bove, a widely followed banking analyst on Wall Street, calls Dodd-Frank “the dumbest piece of legislation ever created by the U.S. Congress. They wanted the big banks to have less control, yet they built in rules that ensure the increased control of the financial sector by big banks…..“And there is nothing in Dodd-Frank that will do anything to stop a meltdown from occurring.”

We’ve been critical of the phony resolution authority as well as other features of Dodd Frank. But the reason is, as the critics Hirsh cites remind us, that the legislation failed to accomplish its stated aims and may be increasing big bank power.

Greenspan, by contrast, clearly object to the basic premise of Dodd Frank, that governments should have any meaningful say over the operation of financial financial firms. Einstein defined insanity as doing the same thing over and over again and expecting different results. But the true madness isn’t that Greenspan’s remarks border on deranged; he’s merely a useful and highly paid idiot. It’s that anything he says is still listened to after the huge cost his misguided policies have inflicted on all of us.

101 comments

Unfortunately, if conservatives can obfuscate what a horrible vacuous pawn Reagan was then making Greenspan look however they want is a piece of cake.

Yves, while you and others can see that the wheels have come off, the vehicle has a considerable amount of momentum, the propaganda throttle is at max (we just started our third running war) and since they are doing Gawd’s work, they have convinced all the blind faith based folk to follow them leading all of us over the proverbial cliff.

For twenty years I listened to people saying Dr. Greekspeak was too brilliant to be understood by mere mortals. All that time he was talking nonsense and nobody seems to have known except for me and Yves. Life is indeed a lonely experience.

Not so. I was there too, but I didn’t see you. And that indicates another problem. The momentum that drives this behavior can really overwhelm us. And it continues. I wonder why Yves continues to rail against the banks and foreclosure firms. We can see where this is going. But what to do? Can we do more now than before?

About the only thing a person can do is avoid debt and protect his money (if he still has any) by not gambling in financial markets. Those who have done that have missed out entirely during the past two years, but at least they avoid income tax by not having any income. The idea of changing anything through politics is ridiculous for those lacking the cash to buy politicians. It also helps to have a sense of humor and a sense of history. Only in America and after WWII did ordinary people believe any nonsense about an American Dream. Most of the believers ended up going crazy in the suburbs and their heirs are now mostly insolvent and divorced. Government always has been a malevolent force that grinds down producers and works only for those pulling the levers or holding down patronage jobs. Leaving aside those absurdly talented, prosperity was largely limited to those who took on corporate dirty work, milked academic and union sinecures and professional licenses or took serious individual risks on borrowed money and were bailed out by inflation. Or you could have bought index funds in 1977 and never sold a share until 2008. Looking backward it is difficult to imagine why everyone didn’t just do that.

If you have read Greenspan’s last book even he admits that (paraphrase) “The more I obfuscate before Congressional Hearings the more they seem to understand me!”
In other words he knows he is a “farce” but it seems that’s the kind of “economists” our system loves.
It was a game he played to the hilt!

Please, can they just leave now? Among other effects, that would enable us to assign all the special forces/black ops assets the U.S. developed for the GWOT after the real terrorists and enemies of our civilization, and let us deal with them without expensive, tortuous lawsuits.

“Advanced economies have become hooked on debt technology, which, like XCrop, is habit forming and hard to wean oneself off of due to its lower cost.”

The costs never seemed lower to me, since ‘debt technology’ is precisely what has enabled the prices of normal peoples’ housing stock, educations and such necessities to be blown up to many multiples of their salaries. Till they increasingly can’t pay for these necessities.

No, because if they go to a small country like Singapore, the government would never be able to save them… But doesn’t that mean that we actually have leverage over those banks, you ask? No, of course not, because bailouts will “never happen again”.

Right on Foppe! It all comes down to the spectacular tax base in the US, and of course I don’t mean the corporate tax base, which apparently isn’t so spectacular. I mean the peons like me who are earning 30, 40, 50 k and filing our returns. Of course we file because of the tax code, the penalties and viscious-watch-dog culture of the IRS. Some of us may even file out of a sense of duty, or patriotism.

Whatever the reason, we file and get comparatively little in return: weak regulation, failing public education, crumbling infrastructure, appallingly inefficient health care. The average German pays about the same, by some equations a little more, and gets free education from grammar to grad, diverse transport infrastructure, lots of holidays, a somewhat efficient health care system.

An unscientific comparison indicates that, aside from the wasteful, oppressive, and immoral security state, about the only unique form of compensation accruing to the American taxpayer as a result of paying taxes is a paper bag with “Freedom” printed on it and instructions on how to put it over your head.

The Tragedy of the Obama Administration
By Barry Ritholtz – November 2nd, 2010

“””To me, his presidency began its fatal downward spiral once he allowed Robert Rubin to determine his initial financial appointments. By passing over more pragmatic candidates not tied to banks and Wall Street, the president missed his opportunity to rise to greatness.

The opportunity existed to get the renegade banks under control — to reduce their leverage, their recklessness, and to get their hands out of the taxpayers pockets.

That opportunity was squandered, and Obama ended up as a defender of the banking status quo. It is where his presidency could have achieved lasting greatness, and instead was turned into just another elected official, who over promised and under delivered . .”””

I suspect that the stress on regulation would have been less if, for example, the bust in 1998 had been allowed to claim a few more deserving victims before the monetary policy authorities intervened. Once bit, twice shy.

Also, I would say that I was personally making this point in official circles as far back as 2000 and not getting much traction, including from some of the people whose views on the financial crisis and what to do about it are sometimes mentioned here.

As the Progressives farmers used to say to the hard-money-is-gold faction, let them only eat their gold for month and then tell us how much a bushel of wheat is worth. An economy marches on its stomach.

No, neglect of regulation and monetary policy; it all comes out of the same pocket. Within weeks of his appointment and his response to the program trading flash crash of ’87 the markets knew they had him in THEIR pocket. And the cacophony of saved bankers who were to canonize him made any counter-argument impossible. Nobody wanted to hear that. And now he has no creditability. Ritholtz had the best comment about it last week. But the saved bankers still control the moment. How is that possible?

I don’t think so. Monetary policy easing was for the electorate generally, not just financial professionals. This is, I fear, an important omission from the discussion of the financial crisis. To some extent, the crisis was created by a demand from ordinary people for low interest rates on borrowing and high returns on financial investments. But it is politically easier to blame the “banksters”, so the cultural moral hazard lesson is not being learned – in fact, the authorities are presently trying to sustain it with excessively easy monetary policy, especially in the UK.

To some extent, the crisis was created by a demand from ordinary people for low interest rates on borrowing and high returns on financial investments. But it is politically easier to blame the “banksters”, so the cultural moral hazard lesson is not being learned – RebelEconomist

Imagine a clever counterfeiter comes to your town. His product is perfect, indistinguishable from the genuine article. But he doesn’t spend his money. Instead he lends it out for interest. And what a fine fellow he is; his loans are low interest! Soon there is a housing boom. Everyone but you, since you believe in saving instead of borrowing money, borrows money and speculates on housing. Soon you notice that the price of housing is rising faster than your savings are (negative real interest rates). So what do you do? You give up and borrow from the counterfeiter yourself.

Let’s not blame the victims of the bankers. What real choice did they have?

But your decision whether or not to participate in the boom depends on your expectations of the future. If people think that the higher house prices will prove unsustainable, they will hold back from buying houses, and the boom will be self-limiting. That is why it is vital for foreclosures to take their course (although I would support mitigating the impact of them on the borrower by transitional relief grants).

The system collapsed partly because of “Greed” and “Trust”….Trust in a system that (naive) consumers trusted to be honest and truthful which history tells the more well informed that trusting in bankers/financial houses after the 1970’s in general was just plain stupid.
Greed that encompassed both sides of the equation…a situation not likely to be embraced by the uninformed consumer or the short sighted monetary gains of the “seller” in order to fulfill his/her vision of the “American Dream”. (Which we all know now for the lowly masses has turned into the American Nightmare)
Trust was thrown out of the window when banking “changed” early in the 1970’s…Greed enlarged it’s immense grab in the 1980’s and hasn’t stopped since.
The new Dodd/Frank Bill is a comedy.

“”The Bank of Clark County had 100 employees and assets of $446 million — it was a really small bank. But the federal takeover kept 80 FDIC agents, about 50 Bank of Clark County staff, and 100 Umpqua employees, working round the clock for three days.

Most of the largest banks in trouble right now — Citibank, Bank of America — are about 6,000 times the size of the Bank of Clark County and much, much more complicated.

Considering the scale involved, it’s not surprising the U.S. Treasury secretary’s latest plan does everything it can to avoid using this process on those big banks. When you take over a little bank, it’s called receivership. When you do it to a big bank, people throw around the word nationalization. “”

But they may have a handsome Republican prince kiss Greenspan on the lips and we can watch him transform into Leona Helmsley without the multiple face lifts. That would be fun.

Anyway, for even more chucles, I’m sort of looking forward to the sure to come Greenspeak study proving that CDS creation greatly increased Learjet production and we all know the Little Peoples are employed making Learjets.

Yves, the moment I read Greenspan’s piece, I knew you’d be on it. Thanks for providing a forum for examining its’ fallacies & inconsistencies.

As Yves noted, Greenspan destroys his own position with his final statement “we may have to address the as yet unproved tie between the degree of financial complexity and higher standards of living.” So he expects us to buy his arguments based on a supposition? Arguments that frame a basic structural element of our society?

However, the article does underline some major, and as yet, un-addressed serious difficulties with the financial system.

The big Banks now all operate multi-nationally. National regulation then becomes ineffective. Yet we have no multi-national regulatory body apart from the BIS, and they act first and foremost to preserve the independence of the Banks, or the IMF, which has no charter in that domain.

Can this issue be resolved? Or are we forever at the mercy of the big Banks?

“And on top of that, he [Greenspan] allowed banks to develop their own risk models and metrics, … “ Yves Smith

Greenspan assumed that in a free market that the banks would look after their own welfare. But what is “free-market” about a government backed (lender of last resort, asset buyer of last resort) fractional reserve banking cartel extending “credit” in a government enforced (legal tender laws, the capital gains tax) monopoly money supply? Ans: absolutely nothing.

If we remove all the government props for the finance system
then those in it would be careful or else go extinct.

Instead, the government has made a Faustian bargain with the bankers in exchange for a cut of the loot.

BTW, Greenspan, apparently not content with the damage he has caused so far, is in favor of a government enforced gold standard, as if more government privilege for the usurers is a good thing.

But Bernanke recently said to Ron Paul that he believes the “value of money” is established by the GDP, a la Nixon, a basket of consumables like food and clothing. (When Nixon finally managed to get us off gold!) Roubini calls gold a “barbaric relic.” Nobody in their right mind will be willing to go back on a gold standard because gold is the ultimate fiction. This entire gold farce reminds me of Six Characters in Search of a Play.

You can rest assured that the USofA will never willingly pay off it’s $14 trillion, and rapidly growing, debt with the ever escalating cost of gold. Unless someone points a whole lot of nukes at us, maybe. Same goes for Japan and Europe.

There really is no reason at all to go back on gold based currency. All individuals need to do is take their dollars, euros or yen once they electronically appear in ones bank account and buy gold bars, illegal tender like those Eagles, Maple Leafs and Krugerrands which masquerade as real money, or even a gold ETF if one is weird enough to believe in paper gold.

I know this sounds gold buggy, but I’m kicking myself for not doing it in 2000 when I could of had it at $300/oz.

But I have my excuses for being so dumb. I always thought I’m supposed to get a real return for the use of my money. So that’s gone out the window.

Then I never really believed that the pyramid and eye printed on our bills was really some sort of Templar symbolism. I interpreted it to mean the Watchful Eye Of Volker is looking over our pyramid scheme of fiat currency fractional banking. Wrong again.

Then if we are supposed to trust in God, why hasn’t he been hurling lighting bolts at the Bernank? And why isn’t Greenspan covered from head to toe in locusts?

These events and non-events of late are completely shattering my belief system.

“But Bernanke recently said to Ron Paul that he believes the “value of money” is established by the GDP, a la Nixon, a basket of consumables like food and clothing. ”

One minor correction. The Fed position is that iPads are consumable…but food is not. They are presently studying whether cotton based clothing are consumables. Petro based clothing is, but gasoline is not. Anything based on hedonic price adjustments in the calculation of CPI is consumed at a lower cost by the CPI models, but at a higher cost by people that might buy the stuff. And of course putting lots of china stuff in the index certainly helps the purchasing power of the Yollar as well.

“But the true madness isn’t that Greenspan’s remarks border on deranged; he’s merely a useful and highly paid idiot. It’s that anything he says is still listened to after the huge cost his misguided policies have inflicted on all of us.”

The question is: who IS still listening to him? My guess is that most people view Greenspan as a fossil. Those that ‘listen’ to him probably don’t listen to him at all – they just find him to be, in your words (actually they’re Lenin’s…) a useful idiot.

Have you ever seen the film ‘Being There’? Peter Sellers plays a simple-minded, partially retarded gardener who is mistaken for a successful businessman and adviser to the US government. Everyone thinks that Sellers is a genius – but he’s actually retarded… literally.

What’s really happening is that everyone around Sellers recognise that they can use what he says – which, due to his being retarded, is always almost nonsensical, but everyone takes it to be cryptic and thus ingenious – to further their own goals and aspirations.

History will judge Greenspan – as it is now. But only for a few years. Then he will be forgotten. Only to be written about in a century’s time as an eccentric and intractable banker – like those found spread throughout JK Galbraith’s excellent book ‘Money: Whence it came, where it went’.

Then he will be forgotten. Only to be written about in a century’s time as an eccentric and intractable banker – … Philip Pilkington

Hopefully, the memory of conventional banks will be a distant memory too.

It is a mistake to think our current problems are a result of human failure. The very system is rooted in fraud and based on theft of purchasing power. Then how on Earth can it be stable?

For our struggle is not against flesh and blood, but against the rulers, against the powers, against the world forces of this darkness, against the spiritual forces of wickedness in the heavenly places. Ephesians 6:12

Philip Pilkington said: “What’s really happening is that everyone around Sellers recognise that they can use what he says – which, due to his being retarded, is always almost nonsensical, but everyone takes it to be cryptic and thus ingenious – to further their own goals and aspirations.”

Actually, PIMCO pays him as a consultant. Why, I have no idea. Maybe he says something different behind closed doors to a paying client than he does in public. That may explain it.

I am quite certain that Peter Sellers was on track to be Greenspan’s replacement, but Peter died and they had to go with Ben instead. After all, to be Fed chairman all you need to do is lip sync to the Taylor Rule.

Not only was Jerzy Kosinski’s protagonist in “Being There”, Chauncey Gardner, a border-line clinical idiot, but his entire frame of reference outside of gardening was his self-education through watching TV soap operas, sit-coms, and dramas. Consummation of TV portrayed sex/love was defined in his mind only as a kiss and a fade-out, and everything ended happily. A classic satire that reflects the American psyche far more than we would hope as well as how gullible American Leaders are when it comes to mind-numbing and moronic platitudes.

Mr. Kosinski’s excellent “Being There” reflects America today even more than it did when it was written in 1971. It wouldn’t surprise me at all if it had a prominent place next to “Atlas Shrugged” on Greenspan’s bookshelf as a reference, and testament, to the stupidity and gullibility of America’s movers and shakers.

Greenspan is like the industry he was supposed to regulate – eager to gain credit and glory for the success of the banking sector and quick to point the finger of blame elsewhere when the sector collapses.

And like the sector he was supposed to regulate, Greenspan’s behavior is very dangerous to the American economy.

Am reading “Maestro” now (by Woodward). The preface is nearly giddy with excitement over the prospect of managing the huge surplus we had back in 2000…. Those were the days!

“Atlas Shrugged” is a celebration of life and happiness. Justice is unrelenting. Creative individuals and undeviating purpose and rationality achieve joy and fulfillment. Parasites who persistently avoid either purpose or reason perish as they should. Mr. Hicks suspiciously wonders “about a person who sustains such a mood through the writing of 1,168 pages and some fourteen years of work.” This reader wonders about a person who finds unrelenting justice personally disturbing.

• The large mass of Jews is as a race culturally unproductive. That is why they are drawn to the negro than to the culturally higher works of the truly creative races.
▬Adolph Hitler, speech to national Party meeting, 1938

• [T]he obligation in accordance with the Eternal Will that dominates this universe [is] to promote the victory of the better and stronger, and to demand the submission of the worse and the weaker.
▬Adolph Hitler, Mein Kampf

“You have the courage to tell the masses what no politician told them: you are inferior and all the improvements in your conditions which you simply take for granted you owe to the effort of men who are better than you.”

Ludwig von Mises to Ayn Rand (Greenspan’s intellectual hero.) If that’s not telling, I don’t know what is. Ace sociology there, Ludwig. Institutions/genes/socioeconomic background/public services/the creative commons are irrelevant; all progress is just the trickle down from the demi-god like individuals who stand so far above us. Coincidentally, these demi-gods are us and our friends. The surprising parallels between fascism and libertarianism are a little shocking (of course, there’s also that quote from von Mises about how he didn’t like fascism in the long run but in the short run it had “saved Europe.”) In the words of Gang of Four, “history’s not made by great men.”

“You have the courage to tell the masses what no politician told them: you are inferior and all the improvements in your conditions which you simply take for granted you owe to the effort of men who are better than you.” LV Mises? to Ayn Rand?

LOL! Did Mises really say that?

If so, then someone should have informed Mises that those improvements were made with the masses’ own stolen purchasing power. Except LVM understood fractional reserve lending and opposed it. But since he and Ayn Rand were in favor of a (presumably government enforced) gold standard then the charge of “fascist” might still be valid.

You guys are wrong about Ayn Rand. If she ever listened to Greenspan she would have thrown up. He and the Fed are representative of everything she railed against. It is true that the producers are simply plundered by corporate bankers and monopolists. But it is also true that only heroic individual efforts produce significant improvements to the human condition. Rand believed that government was an essentially parasitic force. Does anyone looking at the past twenty years seriously doubt that? Anybody still expect Obama to change anything except his own financial condition?

Yep. As we saw yesterday on the thread about Thomas Paine, jake has a slight problem keeping his facts straight.

They say a picture is worth a thousand words, and I think this photograph of Greenspan with President Ford and Rand in the Oval Office in 1974 speaks volumes. Looking at that photo, I’d say Greenspan and Rand were pretty thick.

I found this from the Wikipedia link you furnished to be most intriguing:

Although Greenspan was initially a logical positivist, he was converted to Rand’s philosophy of Objectivism by her associate Nathaniel Branden.

Here’s a little history on Nathaniel Branden from a book review by Adam Kirsch:

In 1949, Rand was living with her husband, a mild-mannered former actor named Frank O’Connor, in Southern California, in a Richard Neutra house. Then she got a fan letter from a 19-year-old college freshman named Nathan Blumenthal and invited him to visit. Rand, whose books are full of masterful, sexually dominating heroes, quickly fell in love with this confused boy, whom she decided was the “intellectual heir” she had been waiting for.

The decades of psychodrama that followed read, in Heller’s excellent account, like “Phèdre” rewritten by Edward Albee. When Blumenthal, who changed his name to Nathaniel Branden, moved to New York, Rand followed him; she inserted herself into her protégé’s love life, urging him to marry his girlfriend; then Rand began to sleep with Branden, insisting that both their spouses be kept fully apprised of what was going on. Heller shows how the Brandens formed the nucleus of a growing group of young Rand followers, a herd of individualists who nicknamed themselves “the Collective” — ironically, but not ironically enough, for they began to display the frightening group-think of a true cult. One journalist Heller refers to wondered how Rand “charmed so many young people into quoting John Galt as religiously as ‘clergymen quote Matthew, Mark, Luke and John.’ ”

Inevitably, it all ended in tears, when Branden fell in love with a young actress and was expelled from Rand’s circle forever. That he went on to write several best-¬selling books of popular psychology “and earned the appellation ‘father of the self-esteem movement’ ” is the kind of finishing touch that makes truth stranger than fiction. For if there is one thing Rand’s life shows, it is the power, and peril, of unjustified self-esteem.

This idea of “unjustified self-esteem” keeps popping up today. As Kirsh points out,

Rand’s particular intellectual contribution, the thing that makes her so popular and so American, is the way she managed to mass market elitism — to convince so many people, especially young people, that they could be geniuses without being in any concrete way distinguished.

Now compare Rand’s “intellectual contribution” to that of Edward Bernays and Ernest Dichter, the masterminds of corporate propaganda, as described inthis article linked by commenter Toby today:

This propaganda of the 1940s and ‘50s was really hinged on the need for security — or, to put it another way, on the anxiety aroused when a feeling of security was not obtainable. The manipulators took this knowledge and directed their efforts at younger and younger cohorts. “It was discovered that young wives, who had only been to high school and had never worked, were more ‘insecure,’ less independent, easier to sell. These young people could be told that, by buying the right things, they could achieve middle-class status, without work or study. […] The main point now was to convince the teenagers that ‘happiness through things’ is no longer the prerogative of the rich or the talented; it can be enjoyed by all, if they learn ‘the right way,’ the way the others do it, if they learn the embarrassment of being different.” (21) And the methods of reaching these young women were seemingly extracted right out of Bernays’s handbook, with group leaders, school faculty (teachers and guidance counselors), and TV advertisements playing huge roles. “This is the big market of the future,” as Dichter says, “and word-of-mouth advertising, along with group pressure, is not only the most potent influence but in the absence of tradition, a most necessary one.” (22)

So it doesn’t sound like Rand was stupid. Quite the contrary, she figured out how to control and maniuplate insecure and anxiety-ridden young people. Greenspan would have been in his early to mid-twentites when he fell under her spell. But unlike Blumenthal, he never managed to escape.

And @Jake Chase, bone up on the history, brother. “But it is also true that only heroic individual efforts produce significant improvements to the human condition.” This is patently false. First of all, rarely if ever can you trace a significant improvement in the human condition to one person. I would say never, but even if you can find ONE example where a significant improvement is clearly ALL or MOSTLY due to one person’s efforts, where did they get their ideas from? Others in the past. Most of history’s great ideas were minor modifications of recent ideas or straight copies of ideas that had fallen out of fashion. Or to make it even more concrete, how did these heroes even survive to adulthood? Their parents took care of them when they were minors, or to use your terminology, parasites. You can make a case for libertarianism on certain metrics or criteria but an ideologically motivated, un-falsifiable reading, MASSIVE generalization of history (though if you managed to put it in falsifiable form, I guarantee someone would debunk it instantly.)

Greenspan is right about the current model leading to an enormously successful standard of living. He has looked through the telescope at his own cohort and seen that they have never had it so good whether they were successful or failures. You critics are looking through the wrong end of the telescope at the set of cohorts beyond the top one tenth of one percent income gougers. Greenspan cannot see those cohorts using his end of the telescope.

OK. You hate Greenspan – now. You think that government bodies should regulate. You think that rent seeking should not be endorsed. You think that moral hazard is not an issue if we all agree to be good. You think that financial complexities have something to do with the decline of Detroit. Maybe if we put you in charge all the badness would go away?

Governments have always regulated; rent seeking has always been bad, and who, other than Greenspan and other neo-classical terrorists, has said that moral hazard is not an issue?

Greenspan typifies the idiocy of the United States over the last 30+ years. He was a chief regulator who believed that regulating was unnecessary. A puppet for those who wanted free reign over the economy. Classical economics has always stressed that rent-seeking is detrimental; neo-classical economists haven’t denied this, they just tried to build a system where it can’t be controlled. I think a basic rule of thumb regarding finance is: greater complexity equals greater chances for thieving.

Without the government enforced usury cartel, would not owners of capital be forced by market pressures to share wealth via issuing their common stock as money? Conventional private money is an unnecessary, expensive and exploitive medium of exchange that has been obsolete since the common stock company was invented in 1602.

Taxing rent is not the solution; that is merely loot sharing. We need to abolish those things that prop up the usury cartel in the first place such as legal tender laws for private debt and the capital gains tax.

It’s been at least two years that I don’t take too
seriously what Greenspan says. At least since the
day in October 2008 when he uttered the words
“shocked disbelief” and
“We are in the midst of a once-in-a century credit tsunami,”.

I’m more interested in the Final Report of the
Financial Crisis Inquiry Commission which came out
this past January. It weighs in at 662 pages, and the
computer filename is GPO-FCIC.pdf .

The vexing question confronting regulators is whether this rising share of finance has been a necessary condition of growth in the past half century, or coincidence. In moving forward with regulatory repair, we may have to address the as yet unproved tie between the degree of financial complexity and higher standards of living.

Should read: The vexing question confronting society is whether the rising fraud in finance can be sufficiently constrained to avoid it undermining future growth and prosperity. In moving forward with regulatory repair, we will have to break the perception that there is a link between the degree of financial complexity and higher standards of living.

Even dangerous fools like Greenspan are capable of making interesting points. Your translation is pretty funny, but a serious issue lurks underneath. How can we preserve the benefits of modern finance without falling prey to its vices?

It is indisputable that lowering the cost of financial intermediation aids economic development (lowered cost of capital, making inter-temporal savings/consumption decisions easier, etc). Financial complexity often accompanies these lower financial intermediation costs.

Yves might argue that there is a “saddlepoint” solution whereon finance is just complex enough to facilitate development but not so complex that it collapses in rent seeking, risky behavior etc. We are going to have to find this point and it isn’t going to be easy.

For better or worse, we have an ass-ton of debt in the West and a highly complex financial system. This issue is not going away.

For better or worse, we have an ass-ton of debt in the West and a highly complex financial system. This issue is not going away. Steve

If the Bible has the key to monetary reform (Matthew 22:16-22) – separate government and private money supplies – then should the commands for restitution for theft and debt forgiveness ( Deuteronomy 15 )be ignored?

Second question: Is debt to a government backed counterfeiting cartel morally valid?

“How can we preserve the benefits of modern finance without falling prey to its vices?”

A return to state chartered banking would be a start. Worked well for many decades. Here in NC, Wachovia was a conservative, much loved and trusted bank out of Winston-Salem. Then came First Union , national banking , Golden West Financial and then destruction. All the shame.

Well Jim, it’s an interesting history. The North Carolina banks advocated a “regional compact” wherein their banks could merge with other Southern banks to form “super-regional banks”. They thought they could counteract the dominance of Yankee bankers by building up regional champions. It didn’t work.

The old NCNB (now B of A) was the first of this type, led by the charismatic Hugh McColl. Then came Ed Crutchfield of First Union. The great John Medlin of Wachovia, widely revered as the best banker in the South, was skeptical of all this consolidation. He resisted it, but Wachovia eventually succumbed and the rest is history.

A mere 25 years ago, Southerners worried about bank concentration and Yankee domination. Their remedy – forming their own super-regional banks – ironically triggered the gigantic wave of banking concentration we experienced. And the Yankee domination that they originally feared came to pass, as Wall street dominates all of us in all regions.

Their worries of only 25 years ago now seem quaint. The reality has ended up being so much worse than they could have imagined.

Steve says: “For better or worse, we have an ass-ton of debt in the West and a highly complex financial system. This issue is not going away.”

There is also a maxim that is being broadly ignored – debts that cannot be repaid, won’t be. This is the crux of the matter. Rather than seeking a rational approach to dealing with default and the potential systemic avalanche, TPTB are wildly screaming “no default” while feeding the Ponzi. And in their view and that of much of MSM – it is working – things are getting marginally better. But the willful ignorance of reality (debts that cannot be repaid…) does not change that reality. Eventually, not only will the globe tire of carrying U.S. debt, they will tire of holding U.S. dollars. It is way beyond my skills to say whether this will happen sooner rather than later, nor can I say whether it might happen precipitously, or simply slowly cook our goose, but there is no indication whatsoever that TPTB are willing to rethink their approach, so I am convinced that the death of the dollar is inevitable. Utterly inevitable. And BTW – that won’t be Greenspan’s fault – it will be Bernanke’s.

There doesn’t seem to be much interest in QE3 now which may be due to the effect QE is probably having on commodity prices. QE3 was thought to be necessary to bail out the municipal bond market. Wile Coyote may continue his fall once the stock market recognizes the game is over. Everyone seems to think they can get out at the right time. Also the banks seem to be slowly losing the game with MERS, put-backs and falling home prices. Extend and pretend may have run its course. Food and fuel (commodities) may be the reality check. But this may be the road to getting us back on track.

True, lowering costs aids development; which is the basis of all public infrastructure spending. The finance system doesn’t do this. Instead the associated costs have increased exponentially. Today, the finance industry accounts for 40% of corporate profits. Try and digest that number!! Forty years ago the number was ~5%. Try and name one fiancial innovation over the last 30 years that has brought prosperity. There isn’t one. Even Paul Volcker admits this.

Witness all the corporate takeovers during the 80’s. The financial industry lent money to a pirate who buys a company and tears it apart in order to pay the banks back while the pirate pockets the difference. This is what the finance industry does: it ensures people with the right connections can access unlimited amounts of cash, regardless if it’s used to destroy productive companies or collapse another country’s currency.

No sane society should leave such power to an unnacountable private sector. I guess most people have forgotten, but the whole theory behind our government is that it is for the people, by the people, and accountable to the people. Nothing else should be allowed to exist that challenges the power of the people.

In class warfare the principal weapon is distraction. Its goal is to direct attention away from the looters, and it is primarily accomplished by setting the victims of that looting against each other and the constant repetition of propaganda. This propaganda doesn’t have to make sense. It doesn’t have to be supported by facts. It just has to be repeated, and repeated, and repeated. It muddies the waters. It changes the terms of the debate. Indeed it becomes the debate. All of this is important because all the time we spend on Greenspan, all those he can still convince or leave unsure, all of this is energy lost in organizing and resisting the looters and their looting.

Greenspan is not just a dope. He is a very malevolent dope. All those who support our current kleptocracy are not mistaken or well-meaning but wrong. They are vicious brutal people. They are responsible for the deaths of tens of thousands a year. They have ruined the lives of tens upon tens of millions. These are not people who are in over their heads. They want this and will trample any and all of us for as long as they can and as long as we let them.

Even if fin reg required originators hold say 50% of whatever debt they underwrite, would it make a huge difference? The problem is behavioral, recent precedent showing TBTF won’t go away, and toothless enforcement. GS is still using its prop desk per a recent Bloomberg article. Basically giving fin reg a big screw you and playing chicken against these guys. You make these rules, guys like GS say sure, no problem, and then go about doing what they were doing before!

Going back to larger retention of underwritten debt, who cares? If I’m a banker, post 2008, I now see that that I can still do whatever I want and have no professional or criminal repercussions. Whether it’s mortgage loans or buyout bank debt, I can say sure, we’ll take the entire piece down if you want. Cause I get paid at the end of the day on origination and it’s still the belief of you’ll be gone, i’ll be gone when the crap hits the fan. So FICO 100 wants to borrow $500k for a house, no problem, we’ll take the whole thing down on our books. Then when things blow up, big deal. USG still will come bailing us out because these banks are just TBTF.

It would make a big difference. If banks can use a model where they can originate anything, pocketing a slice for doing a transaction, then can obfuscate and pass off the risk to individual investors or even other banks, it just begs for criminal behavior. If the USG doesn’t have to bailout TBTF banks because banks thrive under this biz model (killing off those of us whom are getting quite accustomed to failure), then the USG itself bears no risk of failure in a bank bailout we can’t afford.(and government officials can even look forward to $100 million careers after passing thru the revolving door…it takes real talent to fix ailing banks) They then have no real motivation to regulate against this scenario. It’s all synergistic, in a sort of criminal enhancing way.

Then again, here’s the direction things are really moving. Our favorite rich kid, Timmay, is suggesting we hand out Frankendodd exemptions on retaining 5% of mortgage financing deals. This would be for banks that are known to have exemplary underwriting standards..i.e. ones that have stealth aircraft radar evading characteristics.

clipped from zero hedge:

On the right hand side of the Treasury Department website homepage, under the subheading Wall Street Reform, is the following lofty statement: “It is time to restore responsibility and accountability to our financial system.” That’s the spin. Now, it’s been spinning there awhile, so it’s not exactly news. But today, in complete contrast to the meaning of that statement, Geithner suggested backing a ‘risk-retention’ proposal that excludes banks that meet high underwriting standards (probably those that got high marks on the latest Fed stress tests for which the Fed isn’t releasing any details) from having to retain portions of the deals they securitize, you know, of having to maintain a stake in the outcome of those deals and the performance and integrity of their underlying loans. To recap, as a result of the 2008 debacle, banks that passed their stress tests, effectively borrow money at next to zero percent. The aftermath of the financial crisis is the loosest monetary policy in our nation’s history. Even with all that help, banks don’t want to be bothered holding anything that could screw around with their capital ratios. Of course.

Greenspan airbrushes out the fact that he is the single person most responsible for the need for massive catch-up. Not only due was he actively hostile to supervision (and if you breed for incompetence, you are certain to get it), but he also gave banks a green light to go hog wild in derivatives land. And on top of that, he allowed banks to develop their own risk models and metrics, which also insured the regulators would not be able to oversee effectively (there would be a completely different attitude and level of understanding if the regulators had adopted the posture that they weren’t going to approve new products unless they understood them and could also model the exposures).

America would not tolerate the notion that NASA engineers don’t understand the mathematical models they use. Ditto areas of physics, applied engineering in manufacturing, and related fields.

Yet the Greenspan Party thinks its just okey-dokey for ‘financial engineers’ to run unsupervised, reporting to people who don’t understand the things they’re supposedly ‘managing’.

Re: the risk models/metrics, the breathtaking bit is that ALL the global regulators agreed with Greenspan.

The concept went supra-national (and virtuallly irreversible) with the Basle Accords. Rejecting the position locally would (and still does) impose a competitive disadvantage on the prudent. Can’t have that in the US, especially now that Geithner assures us we’re on the cusp of a global financial services boom serving the developing world.

That’s what really bugs me. I’m convinced that in 5 years we do a massive taxpayer bailout of US banks lending to Somalia, the Congo, etc… and Janet Yellen buys rusty, leaking pirates ships for the Fed balance sheet. Some will be sunk off the coast of Africa, of course, but still be carried on the books at replacement value.

When they finally realize there’s a bunch of huge mirrors out there in every direction, they’ll have to slim those numbers way down. The way things are now, some of those stars are being counted 10 or 15 times.

“The vexing question confronting regulators is whether this rising share of finance has been a necessary condition of growth in the past half century, or coincidence.”

is that it is a typically indirect manner of speaking that might well be equivalent to:

(new possible paraphrase): ‘I wonder if Capitalism still works at all the way it used to (according to my previous beliefs). That is, I wonder if economic growth like we had in the 1960s will ever happen again in the US.’

That’s more how interpret that particular sentence, regardless of all the other mistakes and harm Greenspan can have responsibility for.

Just a thought. Please somebody correct my math: If every person on the planet was allotted a yearly income of say (US) $30,000 and we estimate the world population to be 8 billion, then that’s 1.8 x 10 to the 14th. Are we talking 1800 trillion $. Or are we talking quadrillions. Or quintillions. That ought to keep the world spinning. Any bankers out there who can inform me?

Well, the number is $240 trillion (compare to the US economy, largest in the world, at about $14 trillion).

Odd as it would sound it would not make us all richer at first. Money only buys what is available, that is, what has been produced by labor. Actual (real) wealth is solely the result of accumulated labor, in the end.

The superficial answer though is a lot of inflation, and one heck of a demand shock — empty shelves, asset bubbles going crazy, etc. But if you knew that it would continue year after year, you’d have some kind of employment opportunities in most nations for anyone willing to work.

Rather than having an allotted income, we should create a system that always has available opportunities to work and earn at a liveable wage. Easier said then done, of course. I say raise taxes on the wealthiest to fund government backed projects in building infrastructure and R & D. As a result, increase the value of our country through these developments, which is a back handed sort of socialism (which I am down for).

By the way I am talking about an absurd tax on the rich. At least above 50% after there first couple of million. If you can’t live good on that kind of money, I lack respect for you. If you think you are worth more, get a grip on reality and how much you stand on the shoulders of others.

Okey-dokey for “financial engineers” to run unsupervised, reporting to people who don’t understand the things they’re supposed to be managing”. And since they didn’t have any financial risk in the securities so created, why to worry? Get ready for the same song, second verse. From a tiny article buried in the middle of WSJ, “CMBS industry ready to exhale”. It seems the CMBS industry believes that a new business model is forthcoming. Per the proposed rule, all they’ll have to do to get the game back on is find a sucker B piece buyer willing to assume and hold the 5% first loss position in the security! Just find that investor and all else will fall into place. With all that has been exposed to date relating to the substantive issues with regard to the securitization model, it is beyond belief that the industry believes that investors would consider buying into commercial mortgage pools, still with absolutely no risk assumed by the sponsor. Who they kidding? Am sure they have Alan Greenspan’s endorsement.

Might I argue that the problem is not Greenspan the man, or the ideas he might have, but rather the role he was filling, the office he occupied? That we have this thing called the Federal Reserve, whose officers are always selected amongst those who are willing to faithfully serve the interests of Big Finance?

“We run the risk, by laying out the pros and cons of a particular argument, of inducing people to join in on the debate, and in this regard it is possible to lose control of a process that only we fully understand.”

Rand believed that government was an essentially parasitic force. Does anyone looking at the past twenty years seriously doubt that? Jake Chase

I’ve read every Ayn Rand book. I used to be a fan. However, a government enforced gold standard is fascist, not libertarian. What is gold, after all, but a shiny scarce metal? Who says it should have government sanction as money? Who says any metal should government sanction as money?

But more to the point, PMs require usury to generate a return. Why then should government sanction usury?

As for government being a parasite that is true but until the government enforced usury cartel wrecked the economy in the 1920’s and 30’s there was little need for government.

I can hardly believe Greenspan objects to government supervising financial firms. Who ever heard of a politician agreeing there are things beyond his purview?

But assuming it is so, the political response should be to withdraw completely; repeal the concessions provided in limited liability and the nonsense about a company existing independently of its directors and shareholders, etc., and see how the banks get by on their own.

It seems that public statements about finance are repeated sound-bites creating a great mountain of absurdity. We don’t have to listen, you know.

I think the basic difficulty is our unwillingness to consider the attractions of a world with only national banks. We allowed their allegation that trade in finance was the same as trade in goods when it clearly is not. We are all mad.

If people think that the higher house prices will prove unsustainable, they will hold back from buying houses, and the boom will be self-limiting. rebeleconomist

Not necessarily. If one times the boom-bust cycle correctly he can make a lot of money by buying low during the bust and selling high during the boom. And since his savings earn negative real interest rates, he really has no other choice than to “dance to the music” while it is playing.

As for foreclosures, a more just solution, imo, would be to give every American adult citizen some debt-free money (United States Notes) equal in total to the aggregate amount that Americans are underwater on their mortgages times from 2-7 since that is the Biblical penalty for theft.